Question

1. Covid-19 virus has created health uncertainties. You could buy an health insurance for yourself against potential Covid viral infection by paying OR 24 every year or, you may buy a life time insurance for a one time payment of OR 400 today. Using a discount rate of 5%, how many years does it take to make the lifetime subscription the better option compared to yearly payments?

.

Answer 1

PV of Annuity  = CF * [ 1 - [(1+r)^-n]] /r

OR 400 = OR 24 [ 1 - [ ( 1 +0.05)^ - n ] ] / 0.05

[ 1 - [ ( 1.05)^ - n ] ] = (400 / 24 )* 0.05

= 0.8333

1.05^-n = 1 - 0.8333

= 0.16667

Take Log in Both sides

Log [ 1.05^-n ] = Log [ 0.1667 ]

Log (a^b ) = b * Log (a)

-n * Log (1.05 ) = Log (0.1667)

-n * 0.0212 = -0.7782

n = -0.7782 / -0.0212

= 36.72

If the time period is more than 36.72 Years, Its better to pay OR 400 today rather than paying OR 24 every year and vice versa.